Court finds for banks in 1st KIKO litigation

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Court finds for banks in 1st KIKO litigation

A Seoul court ruled in favor of banks in the nation’s first ruling in a nearly two-year dispute over the currency derivative called a knock-in, knock-out (KIKO) contract.

The court’s decision is expected to have a wide impact on the remaining 100 KIKO lawsuits.

The Seoul Central District Court yesterday turned down the request by Soosan, a small construction equipment supplier, that Woori Bank and Citibank return profits made from KIKO contracts.

Soosan filed lawsuits against the banks in November 2008, claiming the contracts were invalid since the banks did not thoroughly explain the risk at the time the company subscribed.

Additionally, Soosan argued that the court should rescind the contracts on grounds that they were initially designed to exclusively benefit the financial companies.

The Seoul court said it is difficult to accept the argument by Soosan that the contract was designed exclusively to the banks’ advantage and therefore violated fair trade regulations.

The court said it is also hard to show the banks violated the obligation to thoroughly explain the risk of the contracts since it was difficult to predict that the won would weaken against foreign currency. The court noted that at the time many state-run research institutes predicted the won would strengthen.

On a counter claim filed by Citibank, the Seoul court ordered Soosan to pay 310 million won ($264,500) for canceling its KIKO contract.

A joint committee of companies that suffered from the currency hedging contracts said the ruling would be appealed.

“This is an absurd ruling,” said Oh Soo-taek, of the joint committee. “Although we didn’t expect to win, we thought the court would take a balanced approach. At the time when the small and midsize companies subscribed to the contracts we did so without knowing the actual structure of the product.”

KIKO is a derivative contract designed to reduce potential risk from foreign exchange rate fluctuations.

Under the contracts, exporters could sell dollar earnings at a higher exchange rate to the banks when the currency fluctuates. However, if the foreign currency strengthens against the won to a given limit, the exporters must sell foreign currency at a lower rate, which leads to losses.

Korean exporters flocked to sign up for the contracts between 2007 and early 2008 when the dollar was weakening against the won. However, after the world was hit by the global financial meltdown in late 2008, the dollar’s value shot up against the won. That led to massive financial losses by subscribers who were mostly small and midsized companies heavily dependent on exports.

By Lee Ho-jeong []
Related Korean Article

법원 “은행, 의무 안 어겨”, 기업에 해지금 지급 판결

통화옵션상품인 키코(KIKO)를 두고 기업과 은행 간에 벌어진 소송의 첫 판결에서 은행이 승소했다. 서울중앙지법 민사합의21부(부장 임성근)는 8일 ㈜수산중공업이 “키코의 위험성을 은행이 알려주지 않아 손해를 봤다”며 우리은행과 한국씨티은행을 상대로 낸 부당이득금 반환청구 소송에서 원고 패소 판결했다. 법원은 오히려 “수산중공업은 은행에 계약 해지 결제금인 3억1000만원을 지급하라”고 판결했다.

재판부는 “키코 계약으로 은행이 얻게 되는 이익이 다른 금융거래와 비교해 과하지 않다”며 키코가 은행에 일방적으로 유리하게 설계됐다는 주장을 받아들이지 않았다. 또 “계약 체결 당시 대부분의 연구기관이 환율 하락을 전망했기 때문에 환율 급등으로 인한 가입자의 피해를 예견할 수 없었다”고 말했다. 재판부는 “이런 사정에 비춰 은행이 급격한 환율변동 위험에 대한 설명 의무를 어긴 것으로 볼 수 없다”고 밝혔다. 수산중공업은 2008년 원-달러 환율이 치솟는 바람에 약 180억원의 손해를 보자 소송을 냈다.

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